I am not sure if there is a proper name for this but I am thinking about rolling a straddle or any other strategy (fly etc) on the strike dimension as opposed to time dimesion. I am thinking that with a straddle strategy as a vol trading bet, for a big price move you suddenly get outside of an optimal range for vega, or gamma for example. So in theory you can roll your straddle (sell/buy current sttrike - buy/sell new strike) and keep it on the desired moneyness value. It looks good in theory but is it done in practice? Maybe the cost is too high or any other problem? Are there any practical tips?
By rolling you are taking a loss on your current trade and then putting on a new one. The question is, would you put on the new trade if you had never put on the first straddle?
It doesn't need to be a losing trade. For example let's say you have a great vol forecast model and you predict the vol to be higher than the option price implies in say 3 months. You buy the 3mo ATM straddle and after 1 month the stock has gone up and the IV is lower. Let's say the straddle is at 15 delta now (the put value). So (I guess) it's possible you made some profit from intrinsic value. You still believe in your vol model though and you still want to be long vega but the straddle you own at 15 delta is not ideal. Obviously that's an easy decision, I used this example to highlight that it's not necessary to be in a loss. However the case when the trade is in a loss is where things get interesting.
Option traders would sound like morons, if they said... "my trade is deteriorating, so I am closing down the trade for a loss, and then getting right back into the same deteriorating stock, at another strike and/or contract." So some loser trader created the term "rolling",... so what sounds like a stupid thing to do, instead sounds clever, strategic and sophistocated. Brilliant marketing!
It's called hedging. You basically called everyone who trades stock to delta-hedge an option a moron It's called replication. The OP wants to replicate a delta-neutral straddle using vanilla options. There's nothing wrong with this. It's just a a different type of trade from what you are used to.
Nice try, but I'm NOT refering to any hedging strategy. Just the process and use of the term "rolling". Rolling is a term used to state "I'm getting out of this deteriorating stock, and then getting right back into it..... (assuming we are talking about a losing trade). Rather than taking that remaining unit of cash, and "objectively" considering it for an investment in another stock,... lots of traders prefer to instead put it back into the same deteriorating stock. WHY? Because they feel it's "not really a loss" they just took, if they can make the money back in the same stock. But they are wrong. Once the trade is closed for a loss , it's a loss. But they prefer the "rationalization" that it's not a loss, if the loss is made up in the same stock. While not every single trader who rolls, does it to rationalize away his loss,... many do. Perhaps even most.
Well, think about it for a second. If you trade the straddle later, you are going to be trading it at a different implied volatility. Instead, you could come up with a structure that will retain sensitivity to volatility across a wide range of strikes. Coincidentally, a combination of a straddle and a bunch of strangles will do it for you, but you need to hedge delta.
I don't think you and the OP are talking about the same thing. His question is "how can I trade options in such way so I would not to lose convexity as the stock is moving away from my strike?". His initial (naive) idea was to roll a straddle as the ATM changes - while it might not be correct, it has nothing to do with gains or losses.